Chinese Yuan To Join IMF Reserve Currencies

The People’s Bank of China announced in a statement that the inclusion had the full support of the United States and Britain.

It is used for transactions between central banks and the International Monetary Fund, as well as to decide the currency mix that countries like Greece, for example, receive when the International Monetary Fund provides financial aid.

According to the IMF, the decision is an important step to integrate the Chinese economy into the financial system of the world, which could bring about a stronger and healthier financial and global monetary system.

Concerns about Beijing keeping the yuan artificially low to help exporters is one reason the currency has previously failed to meet the criteria for reserve currencies set out by the International Monetary Fund.

Zhou said that the decision to make the yuan an SDR currency indeed recognizes it was as an global currency, but it also means China is obliged to align its financial system with worldwide standards via further reforms of the financial market and greater opening up.

The Chinese government, however, still pegs its currency to the dollar. In addition, the BOT extended a bilateral swap arrangement worth 70 billion yuan (about Bt390 billion) with China, which appointed Industrial and Commercial Bank of China (Thai) as a clearing bank in Thailand.

“The market now uses a market average for the won-to-dollar exchange, and the cross rate for the yuan and dollar, but from next year it will adopt a direct quote between the won and yuan”.

Charl Kengchon, managing director of Kasikorn Research Center, said the yuan’s SDR entry was only symbolic and would not boost China’s currency demand in the short term. As of now these banks hold about 780 billion yuan, or 1.1% of total foreign reserves held by central banks around the world.

China’s yuan barely moved against the dollar on Tuesday, after the International Monetary Fund (IMF) admitted the Chinese currency into its global currency basket.

To make itself eligible for IMF’s currency basket, China instituted a series of reforms to make the currency “freely usable”, including sharply devaluing it against the dollar back in August. This, after it formed the Shanghai-Hong Kong Stock Connect past year, enabling investors in both markets to trade each other’s shares.

China is the world’s second largest economy.

“There’s this obsession with the [special drawing rights], and it’s completely out of proportion to its economic impact, which is likely to be trivial”, said Randall Kroszner, a former Federal Reserve Board governor who is now an economics professor at the University of Chicago.

But some critics cautioned that the nation’s possible heavy reliance on the yuan could increase Korea’s exposure to sudden global financial market shocks.